Do you really need a bankruptcy?

A Chapter 7 (liquidation or discharge) Bankruptcy is a process under federal law designed to help people who can no longer afford to pay off the debt they have incurred and need a fresh start. Filing a Chapter 7 Bankruptcy stops collection efforts and completely wipes out most debt. The bankruptcy is not a “magical cure.” It is one of several options available to consumers.

What Are the Advantages and Disadvantages of Filing Bankruptcy?

Advantages:

Discharge of most debts.

Creditor actions STOP. Actions such as repossessions, garnishments, foreclosures, utility shutoffs and evictions must stop immediately after the petition is filed.

Protection of exempt property from creditors who have sued you and won in court (they have a judgment against you). Exempt means that it is protected by the law and creditors and debt collectors cannot take it from you.

Disadvantages:

Some of your biggest debts will probably not go away. These include student loans, alimony and child support, restitution and criminal fines. Also, a Chapter 7 bankruptcy can only delay a foreclosure but it cannot prevent the foreclosure from occurring. Also, debts obtained after you file are not discharged.

Possible loss of property that serves as security for certain debts such as home mortgages or car loan.

Possible negative impact on credit rating and reputation. The bankruptcy will show up on your credit report for ten years.

Will NOT necessarily improve your financial situation. A Chapter 7 bankruptcy only deals with debts that arose before the time of filing the petition. Debts which arise after the filing are not covered. If you are likely to continue to have money problems in the future, you may want to wait. You can only file a Chapter 7 bankruptcy every eight years.

It is important to carefully consider alternatives to bankruptcy. There are other ways to end the constant calls from creditors asking for payment that a debtor cannot afford. Some debtors have strong defenses to the debt which can be resolved in court. Some debtors are “collection proof” and creditors can do nothing to harm them. Sometimes becoming educated and learning how to budget can be enough. These alternatives are discussed in more detail below.

If You Are “Collection Proof”

The fact that a creditor or debt collector has a judgment against you (has taken you to court and won) does not always mean you can be forced to pay. “Collection proof” means your income and property are “exempt” from collection. Income considered exempt includes Social Security and SSI benefits, pensions, unemployment benefits, child support, student loan proceeds and FIP. Even wages are protected to a certain degree. The law places limits on how much of your wages can be taken or garnished. These limits are based on federal minimum wage. Your net (gross pay minus Social Security and taxes) must be more than $217 a week before a creditor can garnish and they can only take income above that amount.

Most of your personal property and your house will also be exempt. Exempt personal property includes clothing, household furnishings and household goods (TV, appliances) not to exceed $7,000, equity in a car not exceeding $7,000 , books, wedding and engagement rings, etc. One very important exemption is cash, bank deposits, or the value of any other property up to $1,000. This is known as the “wild card” exemption.

Protections Under Garnishment law

If your wages or bank account are garnished, you must receive a “Notice of Garnishment.” You will have ten days from the date you receive it to file a written “Motion to Quash” and a hearing will be scheduled. At the hearing you can argue that the money taken is exempt or should be considered exempt in the interest of justice. In making that determination, the Court must consider the age, number and circumstances of your dependents, the federal poverty level guidelines and your maintenance and support needs as well as any other relevant information.

What is an “Affidavit of Exemption”?

This is a document you can file with the court and/or provide to debt collectors explaining that you are judgment proof and that all of your property and earnings are exempt. The Affidavit form is available online or through the Clerk of Court in small claims cases.

You Can Stop Creditor Calls

A simple “cease communication” or “stop contact” letter should stop the calls from creditors. There are both federal and Iowa fair debt collection practices laws which require collection agencies, attorneys and creditors to stop contacting you after they receive such a letter. These laws also provide penalties for violating these provisions.

Defend Against the Creditor’s Collection Efforts

If you do not raise all your claims in response to a debt collection lawsuit, you may never get another chance to do so. Raising a defense can also increase your chances of working out a favorable settlement. The following is a partial list of claims that may be raised:

Sales practices. Unfair, deceptive or fraudulent sales practices in the purchase of the consumer goods.

Warranty performance. If the goods are later discovered to be defective or the work is not completed or the work is found to be substandard.

Problems with the credit contract or loan. Both federal and state laws set up various requirements as to what the creditor must tell the consumer about a loan. If this is not done, a defense may be raised if the creditor sues.

Problems with how a creditor tries to collect on a judgment. Failure to follow proper procedure can lead to consumer claims against the creditors.

Getting Help.

You may be eligible for help in paying certain types of debts such as medical debt and property taxes. You may also have the right to ask for a reasonable payment plan. For example, you may be able to ask for a reasonable payment plan for income tax debts and some student loans.

Bankruptcy may be the way for you to get a fresh start but there may well be other options that would work better for you.